The U.S. government should be breathing a huge sigh of relief right now. It was able to temporarily hold off a disaster of its own making.
But the day of reckoning is coming soon…
Every quarter, the U.S. Treasury Department holds an auction to borrow money. During the auction, investors can bid on Treasury bills, notes, and bonds.
The money raised from these auctions pays for services like national defense, Social Security, and interest payments on previously issued debt.
Before the quarterly borrowing begins, the Treasury Department announces how much it plans to borrow.
In August, the department said it would borrow $852 billion in the fourth quarter.
However, on October 30, it cut that to $776 billion. That’s a 9% decrease in the amount it needed to borrow.
The government was able to lower that amount it needed to borrow because tax receipts from California unexpectedly provided additional revenues.
So it just dodged a bullet – even if by the skin of its teeth.
Here’s why…
Over the second half of this year, government bond yields have soared. The 10-year yield reached 5% on October 23. That’s the highest level in 16 years.
If the government had borrowed at its initial $852 billion projection… it would’ve put pressure on interest rates to move even higher.
But the combination of (perceived) benign inflation along with less government borrowing than anticipated caused rates on the 10-year yield to drop to 4.5% over six trading days.
When yields fall, equities generally rally. As a result, we saw the S&P 500 go on an eight-day winning streak – its longest winning streak in over two years.
Meanwhile, the CBOE Volatility Index – Wall Street’s so-called fear gauge – fell from a high of 22 on October 30 to a low of 14 on November 10.
That’s why I say the government dodged a bullet… But the day of reckoning is coming.
Backed Into a Corner
In my opinion, the market is reading far too much in the recent Consumer Price Index (CPI) report.
Randall Forsyth from Barron’s put it best this past weekend when he wrote, “In other words, inflation was negligible if you didn’t eat, drive, or pay for electricity, heat, or hot water, or put a roof over your head.”
Call it luck, provident coincidence, or a little inside baseball, the government sure did capitalize on it. However, this is just the beginning of what is projected to be an epic amount of new bond issuance.
Over the next four and a half months, the Treasury is expected to need to raise $1.2 trillion – and there may not be a conveniently timed “benign” inflation report (or a California bonus) to help bail them out.
We can see with our own eyes the overall demand for U.S. government debt has weakened.
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On October 24, the Treasury auctioned off $51 billion worth of 2-year notes. There were 6% fewer bids than average relative to the amount of debt offered.
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On November 8, the Treasury auctioned off $40 billion worth of 10-year notes at a yield of 4.52%. That’s higher than the pre-auction trading yield of 4.51%. This means the government had to entice investors with a premium over the market to buy their debt.
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On November 9, the Treasury auctioned off $24 billion worth of 30-year bonds at a yield of 4.77%. That’s 0.05 percentage points higher than the pre-auction yield. The disparity on the 30-year bond auction was the most in 12 years.
On $10 billion worth of debt, that’s an additional $5 million. Chump change for sure… But it’s an early sign that all is not well in the Treasury market.
The government is $33 trillion in the hole. So you can see, if these small rate increases start to snowball they can quickly lead the government over a financial cliff.
Banks are still reeling from the March banking crisis caused by their over exposure to government debt. They’ve reduced their purchases, too.
That leaves foreign investors. And they’re not stepping up to the plate, either.
The two biggest holders of U.S. debt are China and Japan. They own $1 trillion and $855 billion of U.S. debt, respectively.
Japan has cut its purchases by 6% in August relative to the year before. And China’s purchases have fallen by 14% over that same period.
Plus, the finance ministers of the Association of Southeast Asian Nations – including Indonesia, Thailand, the Philippines, Singapore, and Vietnam – recently met behind closed doors, and they also decided to start reducing their dollar reserves.
Even the Treasury Department is worried about the lack of demand. On November 1, it warned, “Auctions continue to be consistently oversubscribed but there may be some early evidence of waning demand.”
So it comes as no surprise to me that the rating agency Moody’s recently downgraded the U.S. government’s credit outlook to “negative.” That followed an August downgrade of U.S. debt by Fitch from a top mark of AAA to AA+.
There are only a few outcomes here that make sense for the government to pursue. It can cut rates to lower the interest rate burden… But that will be very difficult for Powell to pull off without losing all credibility.
Alternatively, the Fed can start its bond buying program again (money printing).
Both policies are inflationary. What that means to you is an ongoing loss of the purchasing power of the dollars in your wallet, bank accounts, and retirement accounts.
It’s a lose-lose proposition for the American taxpayer.
How to Keep Your Wealth Intact
The only way to protect your financial security in this era of rampant money printing is to opt some of your wealth out of the dollar-based system before it goes into freefall.
And there’s only one asset I know that will outperform the dollar’s plunge: bitcoin.
As I wrote in Wednesday’s Daily, more money printing equals higher inflation… And higher inflation equals the start of an across-the-board bull market in assets.
We saw this happen in 2020 during the height of the pandemic. To stave off economic doom, the Fed flooded the economy with $13 trillion in stimulus spending.
Since then, bitcoin has outpaced all other asset classes…
As bitcoin takes off, it acts as a slingshot for altcoins. So you could potentially see even greater gains by adding them to your portfolio.
Back during the pandemic – at the same time I was pounding the table on bitcoin – I also recommended several altcoins that took off like rockets as money once again flooded the system.
Subscribers who followed my warning and acted had the chance to make 19x on Numeraire (NMR), 51x on Streamr (DATA), and 79x on Enjin (ENJ).
Recently, I put together a model portfolio of five cryptos – bitcoin and four altcoins – that I believe could potentially deliver the kinds of returns we saw when I made the same warnings in 2020.
You can stream the replay right here…
Friends, the government may have averted disaster this time. But it will need to continue auctioning off debt just to keep the lights on.
The inability to fully service the absurd amount of debt our government has accrued means the Fed will have no other choice but to wind up that money printer again… and dramatically increase the money supply.
This erodes your purchasing power. And the only way to beat it is to either find some way to make a lot more income or find assets that will experience returns that will outpace the loss of the buying power of your dollars.
Those outsized returns will come from crypto assets like bitcoin.
Let the Game Come to You!
Big T